How the Battle of Hastings could hurt insurers

Earlier this month Hastings fought HM Revenue & Customs and the insurer, rather than the taxman, won.

Hastings challenged the Offshore Looping Regulations that were introduced by HMRC to stop insurance intermediaries from recovering input VAT on transactions involving offshore entities.

The insurer argued these regulations were incompatible with Article 169(c) of the Principal VAT Directive, which grants the right to VAT deductions for transactions where the customer is based outside the European Union.

HMRC’s impact assessment from when they introduced the legislation in 2018 quoted the tax at stake as being £65m to £100m per year or £250m to £400m for the period.

The Tax Tribunal ruled in Hastings’s favour and determined that Article 169(c) retains direct effect, even post-Brexit, effectively limiting HMRC’s ability to restrict VAT recovery in similar cases.

Robin Prince, VAT partner at UK accountants and advisers MHA, pointed out to me that this ruling not only benefits Hastings but also establishes a precedent that could lead to widespread claims for VAT refunds across the insurance sector.

“The sum available for refunds will depend on each individual insurance companies tax circumstances but we do know that Hastings cited that £16m was at stake for them for the last four years so it is clearly a significant amount,” Prince said.

“HMRC’s impact assessment from when they introduced the legislation in 2018 quoted the tax at stake as being £65m to £100m per year or £250m to £400m for the period.”

HMRC’s bucket

The financial stakes of this ruling are clearly considerable.

For insurance intermediaries, this judgment represents a significant opportunity to reclaim VAT previously deemed irrecoverable and it should prompt other businesses to review their tax positions and pursue refunds based on similar offshore arrangements.

However, before we all pop the corks on our best bottles of champagne, it is worth noting that this ruling also raises questions about HMRC’s next steps as surely, by now, we all know the taxman isn’t much of a giver. HMRC prefers to take away.

If we think of the government’s finances as a giant bucket meant to collect and store resources for public services, taxes are the water that flows into this bucket, keeping it full.

Just like an old bucket, there are always leaks – gaps in the tax system, loopholes, tax evasion, and economic downturns – that let revenue slip away and the taxman’s job is – like a relentless handyman – to always be searching for cracks and plugging holes.

Sometimes, he patches small leaks with new policies, closing loopholes that allow tax avoidance.

Other times, he might try to widen the inflow, increasing tax rates or introducing new levies to keep the bucket from running dry.

There is no way the taxman will simply shrug his shoulders and wave goodbye to the cash that can be clawed back because of the ruling.

Racing against time, trying to keep the bucket from emptying faster than it fills, I fear HMRC could consider increasing insurance premium tax to offset losses resulting from the Hastings ruling.

Such a move would come with significant political and industry implications but Labour, as shown by the winter fuel allowance decision, isn’t averse to ticking people off and increasing the rate would be a straightforward way for HMRC to recoup lost VAT revenue.

Also, the IPT rate has doubled since 2015, from 6% to 12%, indicating that HMRC is more than ready, willing and able to use this tax as a revenue-generating tool as unlike VAT, IPT is less visible to consumers, making it a politically easier tax to raise.

However, as a government taskforce has been set-up to address what has pushed up the price of motor and home insurance in recent years, the Labour government may not want the lashings from the industry that will come their way if they try to increase IPT.

Rather than increasing IPT, HMRC may instead appeal the ruling to prevent further VAT claims or introduce new legislation to close the loophole exposed by the Hastings case and intensify compliance efforts to recover tax in other areas of the insurance sector.

HMRC will look to recover lost revenue from this ruling so while this battle may have been won by Hastings, let us hope it doesn’t lead to a fiercer war with the insurance industry for more cash to plug holes in the taxman’s bucket.